East African Breweries Ltd (EABL) #ticker:EABL is projected to chalk up lower income growth after 2018 leading to less return on equity (RoE), a new analysis says.

Citi analysts indicate the company, which saw its net profit fall by 20.6 per cent in its latest financial year report, is facing challenges ranging from an excise tax increase to high debt levels.

The brewer, while having a better outlook for the second half of this financial year, has weak growth momentum according to the US firm.

“The second half should be better, but momentum looks weak. The Kenyan economy is showing signs of improvement, with sharply lower inflation and a rebound in economic activity indicators. This should support better performance in the second half,” said Citi.

Underperformance

The investment bank notes that EABL has significantly underperformed large cap peers in recent months.

Data from the Nairobi Securities Exchange show the company’s price per share rose by 9.61 per cent in the past 12 months but shrank by 4.92 per cent in the last six months.

The share price of its large peers — the 10 largest firms by market cap as of February 2 — rose by at least 22 per cent in the past 12 months.

“EABL shares have underperformed Kenyan large cap peers significantly in recent months, but unfortunately these results are likely to discourage investors looking for a quick catch up,” said Citi.

Share price rise

The analysts said the company’s share price is likely to rise to about Sh275, which is only Sh3 above its highest price in the past 12 months.

“EABL continues to be bedevilled by tax volatility in its various markets. For this period it was Uganda that seems to have replaced Tanzania as its problem market, following excise increases there. The company also cited (in announcing six-month results) election-related uncertainty in Kenya as dampening consumer demand,” said Citi.

The return on equity, which stood at 44.30 per cent in 2017, is forecast to rise to 47.56 per cent this year, but then fall thereafter to 44.02 per cent in 2019 and 39.06 per cent in the following year.

This means that the RoE is projected to fall by more than half compared to 2014 when it stood at 81.80 per cent.

Net income is forecast to rise to 28.1 per cent this year, fall to 14.3 per cent in 2019 and 9.5 per cent in 2020.